Should I pay down debt rather than contribute money to my 401k?

Question: Should I pay down debt rather than contribute money to my 401k? 

I owe $25,000 on a home equity line of credit with 7% interest and another $20,000 on a car loan with 8% interest. I have been putting in the maximum (15%) of my paycheck into my 401k. Do you think it would make more sense to stop contributing to my 401k and pay off these loans faster?

Answer:

You should look at your 401k returns and see if its performance is topping the interest that you are paying on those loans. If your 401k performance is higher than 7-8%, then it makes sense to continue contributing the maximum to your 401k. However, if your 401k is returning less than 7-8% per year, then you make want to scale down your contributions in order to pay down those loans. Scale down the 401k just enough in order to get a company match.

What do you think? Answer below!

5 Responses to Should I pay down debt rather than contribute money to my 401k?

  1. brad_47711 says:

    without knowing the whole picture, i suggest you look to cut other expenses, or increase income.

  2. andyinpasco says:

    The home equity loan is fine since its interest is tax deductable. But the car loans gotta go. Postpone your 401 contribution until you get in control of you debt.

  3. ruthietoothie1972 says:

    Does your company only match 1%? You need to look at how much you would save if you kept your 4o1k as it is or if you could save money by paying off your debts…….You may want to contact someone that knows how to figure this out…and not Yahoo Answers…….

  4. country_girl says:

    ok,well I am not good at money matters and figuring financial things out,but, umm if it were me, i would let the home loan ride since i know it is tax deductable,,,,drop your 401k to the1% and get the company match (there is nothing wrong with free money)
    and work on paying off that auto loan with the little extra you bring home

    another option is to leave things the way they are – and work 2 extra days a week at your job or get a 2nd part time job and put all that money towards the loans

    i know easier said then done – people do do it though – i have done it myself

  5. Gatsby216 says:

    Cut back your contributions to 8%.
    Apply the entire amount of that difference to your car loan. Pay that off first. Until then make the minimum on the home equity loan.
    Then make an extra 10% payment to the car loan each month if possible.

    example
    car payment $ 440
    401k change $ 120
    10% $ 44
    New Payment $ 604

    If you are not going to make that payment then just keep things as they are.
    a>

    New car payment

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